Refer to the following information to answer the following questions.
Two firms both emit a pollutant,and the government wants to reduce emissions of this pollutant.Each firm can choose to emit up to six units.As firms reduce emissions,there is a marginal cost per unit.This data is presented in the accompanying table.

-The government allocates three allowances to each firm,where each allowance allows one unit to be emitted.The optimal outcome in this case is for ________ to sell one permit to the other firm,and a price that will be agreeable to both is ________.

Question

Refer to the following information to answer the following questions.
Two firms both emit a pollutant,and the government wants to reduce emissions of this pollutant.Each firm can choose to emit up to six units.As firms reduce emissions,there is a marginal cost per unit.This data is presented in the accompanying table.
 
-The government allocates three allowances to each firm,where each allowance allows one unit to be emitted.The optimal outcome in this case is for ________ to sell one permit to the other firm,and a price that will be agreeable to both is ________.

Quizplus · Accepted Answer

The optimal outcome here is for Firm 1 to sell one permit to Firm 2. This is because the marginal cost of reducing emissions for Firm 2 is higher than that of Firm 1. The price at which they will agree to sell this permit is the difference between the marginal cost of reducing emissions for Firm 1 and the marginal cost of reducing emissions for Firm 2. This is $10 ($40 - $30).

Refer to the Following Information to Answer the Following Questions